皇家加勒比遊輪 (RCL) 2012 Q2 法說會逐字稿

Good morning, my name is Sabrina and I will be your conference operator today.

At this time, I would like to welcome everyone to the Royal Caribbean Cruises Ltd.

second quarter conference call.

(Operator Instructions) I would like to turn the conference over to Brian Rice.

You may begin sir.

Thank you, Sabrina and good morning.

I would like to thank you for joining us today for our second quarter earnings call.

Joining me here in Miami are Richard Fain, our Chairman and Chief Executive Officer, Adam Goldstein, President and CEO of Royal Caribbean International, and Ian Bailey, our Vice President of Investor Relations.

During this call, we'll be referring to a few slides which we have posted on our website, www.RCLinvestor.com.

Before we get started I would like to refer you to our notice about forward-looking statements which is on our first slide.

During this call, we will be making comments that are forward looking.

These statements do not guarantee future performance and do involve risks and uncertainties.

Examples are described in our SEC filings and other disclosures.

Additionally, we will be discussing certain financial measures which are non-GAAP as defined and a reconciliation of these items can be found on our website.

Richard will start with his comments, I will follow with a brief recap of our results and give an update on the booking environment in our forward guidance, Adam will talk about our brands, then we will open the call to your questions.

Richard?

Thanks, Brian, and thank you all for joining us this morning.

As always, I look forward to this opportunity to discuss our business.

I'd like to start my comments though this morning by noting that for a very long time we have always had exactly the same people in this room, but today for the first time in about six years there's a difference.

As you know, Dan Hanrahan, President and CEO of our Celebrity Cruises line is leaving us to assume the reins at Regis Corporation as their CEO.

We extend to him our best wishes while at the same time knowing that his leadership will be missed.

Fortunately, as is the trait of any strong leader, Dan has not only built a terrific brand, but he's built a strong venture of leadership, that provides great depth of talent, one that will seamlessly continue to provide the exceptional experiences that our guests at Celebrity Cruises have come to expect.

We anticipate announcing a successor for Dan in the near future.

Turning to the business environment.

2012 is certainly living up to its billing as an interesting year.

We knew that the Concordia grounding would hurt us in the short return and that expectation unfortunately has proven very accurate.

Fortunately, our other expectation, i.e., that the impact would wane over time has also proven to be accurate, and also fortunately most of our markets continue to perform well despite a very challenging economy.

The Caribbean continues to perform nicely and in a very solid manner.

Alaska is holding up reasonably well, even having as comparables the record yields we enjoyed last year.

In Asia, revenue yields are making us feel exceptionally good.

Despite the fact that we have an 80% capacity increase in Asia, we're see something of the largest regional increases in our Company's history.

Part of this is due to easy comps from last year, but most of it is simply due to better penetration in areas with better economies.

The bummer of course is Europe.

We all knew there were challenges there, but we had not anticipated either the severity of the financial crisis or the roller coaster ride that the politicians and the media have precipitated, and of course, the Concordia impact there has been the greatest and the slowest to dissipate.

These European pressures have outweighed all of the good news for the rest of the world and is driving our yield guidance down by about 1%.

As we reported in our release, we're working hard to offset those changes with cost reductions wherever possible.

Of course, all of us feel frustrated over the combination of Europe's economic malaise together with the impact of the Costa Concordia tragedy.

They have hurt us in what should have been exciting improvements in our returns.

But regardless of these setbacks, we'll continue to focus our energy on controlling costs and improving pricing, the primary drivers of improving returns.

We've had glimpses of the fruit that these initiatives can bear, as our yield improvements prior to the Arab spring last year and the Concordia financial meltdowns this year were exceptionally promising, so we know we're on the right track and we're making the proper structural decisions for the future, but we, like so many others, are frustrated by these barriers.

Having acknowledged this, we remain exceptionally bullish on our industry and with our brands in particular.

As I've said before, we've shown how resilient we are as a company and as an industry.

Looking forward, we're not relying on too much economic improvement to drive our earnings.

Our plan has been to improve pricing, mainly through lower capacity growth, complimented by global expansion of demand, smarter use of technology, and deployment optimization.

Again as I referenced earlier these initiatives are working and I'm quite confident that with a little breather from these outside events, the platform we have built will generate the returns that we must have.

With that backdrop in mind, we're faced with an interesting dichotomy.

Frustration with our current returns, but a long term conviction of significant pricing potential in a era of reduced capacity growth.

We have been transparent about our intent to slow berth growth and we have done so drastically.

From 2012 through 2016, our berth capacity growth is less than 3% and in fact we don't have any ship deliveries in 2013 at all.

But as we said before, we also can't stagnate.

Given the long lead time for a new vessel, we're approaching the point which a new order could not be delivered until the middle to late 2016, by which time we will be enjoying much better profitability and much improved credit metrics.

We continue to make strong progress towards our goal of investment grade results and we are determined to continue on that path.

On the cost front, I'm pleased with our management's responsiveness to the current environment.

This is not an easy task or a short-term challenge, but it is one we're determined to pursue aggressively.

With that, I'd like to turn the call back to Brian for a more detailed discussion of results moving forward.

Thank you, Richard.

On the second slide we have summarized our performance in the second quarter.

We incurred a net loss of $3.6 million or $0.02 per share.

This included a below the line Mark-to-market loss on our WTI fuel options of $0.05 her share for which we do not [kid] hedge accounting.

On an adjusted basis, we had a net profit of $0.03 per share, or slightly better than the midpoint of our previous guide dance.

Net yield improved 4.5% on a constant currency basis and 1.8% on an as-reported basis.

Approximately 280 basis points of the constant currency improvement came from the distribution and deployment changes we talked about back in February.

So on a like-for-like basis, our yields were up 1.7% for the quarter.

Overall, second quarter ticket revenue on a constant currency basis was slightly better than our forecast, driven by strong close-in demand for our Asian products.

Yields in the Caribbean were up just over 7%, and yields in Asia more than doubled after the depressed levels seen a year ago after the Japan earthquake.

As we expected, yields were down year-over-year in Europe.

On board revenue increased modestly in the second quarter, but not as much as we had seen in the first quarter and less than we had forecasted.

On the cost side excluding fuel, our net cruise costs were up 8.3% on a constant currency basis and up 5.8% on an as-reported basis.

Approximately 600 basis points of this increase was due to the structural changes I mentioned previously.

Looking forward, with the notable exception of Europe, the overall demand environment has been relatively consistent with our earlier expectations.

Over the past couple of months, bookings have been running slightly ahead of this time last year from both Europe and North America.

We have seen a shift to a closer end booking window in key European source markets, particularly those in Southern Europe.

The booking window for North America and most other non-European countries is largely the same as it was at this time last year.

Now I would like to walk you through a series of slides that I think will help illustrate the different behaviors we are seeing for bookings in the second, third, and fourth quarters.

This is much more granular than we usually provide, but I am hopeful the additional transparency will help you better understand the current demand environment.

On slide three, we have graphed the evolution of both our load factors and average per diems for second quarter as compared to last year.

The green line shows that our book to load factors were slightly behind a year ago as of the time of our last earnings call.

On the other hand, book day PDs on a constant currency basis which are represented by the red line, were slightly ahead at the same time last year.

As the quarter progressed, you can see we were able to close the load factor deficit with very little change in our year-over-year pricing.

On slide four, we have provided the same chart, but for the third quarter.

As of the date of our last earnings call, similarly to the second quarter, load factors were trailing a year ago, but book day PDs were higher.

The load factor deficit was slightly higher than in the second quarter mainly due to the lost bookings during the wave period, especially for European itineraries.

You can see that while we have made up many of these bookings over the last couple of months, the discounting required to drive the demand has been significant and our book day PDs are now lower than a year ago.

On slide five, we have broken out the pricing portion of the chart by product for the third quarter

Clearly, Europe has required the most discounting and we now expect European yields to be down for the year.

Alaska has seen some price reductions recently, but considering last year was a record year for Alaska, the overall story is still pretty good.

On a more positive note, our Caribbean itineraries and the balance of our product line has seen a relatively stable environment and continue to improve better than a year ago.

The impact of Europe is expected to be felt the most in the third quarter, where European itineraries account for 53% of our capacity.

The fourth quarter is yet another story.

On slide six you can see that as of the time of our last call, both load factors and APDs were running ahead of the same time last year.

For the last few months, bookings have been rather stable and with only 28% of our inventory in the more volatile Europe itineraries, we are hopeful to return to yield improvement in the fourth quarter.

On slide seven, you'll see our guidance for the third quarter.

We expect yields to be down 1% to 2% on a constant currency basis and down approximately 5% on an as-reported basis.

Net cruise costs excluding fuel are expected to increase approximately 3% on a constant currency basis and be flat to up 1% on an as-reported basis.

Embedded in our third quarter guidance is approximately 130 basis points of benefits to yields from the previously disclosed distribution deployment initiatives.

Approximately 230 basis points of the net cruise costs excluding fuel increased in the quarter relates to these same initiatives.

Based on current prices, we have included $213 million of fuel expense for the quarter and we are 56% hedged.

Earnings per share are forecasted to be between $1.40 and $1.50 for the quarter.

On slide eight, we have provided our guidance for the full year.

We expect yields to improve between 2% and 3% on a constant currency basis and between flat and up1% on an as-reported basis.

Approximately 200 basis points of the yield improvement is due to the structural changes.

On a constant currency basis we are looking for like for like performance of flat to up to 1%.

While our yield projections remain within the range we provided both in early February and in April, we have lowered the midpoint slightly.

This reduction is due entirely to the performance of European itineraries.

In fact, if we exclude European itineraries, our ticket yields for the year are expected to be up between 5% and 6% on a constant currency basis.

Net cruise costs excluding fuel are expected to increase approximately 4% on a constant currency basis and approximately 2% on an as-reported basis.

Of this, approximately 350 basis points are due to the international distribution and deployment initiatives.

On a like for like basis, we are projecting net cruise costs excluding fuel to be flat to up 1%, or about 100 basis points lower than in April.

Based on today's fuel prices, we have included $899 million in fuel expense for the year, and we are 58% hedged.

We are now forecasting EPS for the year to be between $1.70 and $1.80.

On slide 9, we have provided a bridges between our April guidance and our current forecast.

The midpoint of our April guidance was for earnings per share of $1.95 and we have reduced that by $0.20.

The lower revenue expectations driven by Europe account for a $0.32 reduction.

The strengthening of the US dollar has cost us about $0.13, but this has been mainly offset -- mostly offset by lower fuel costs.

As I previously mentioned, the Mark-to-market accounting for our fuel options cost is $0.05 below the line and our across-the-board spend reductions have saved us about $0.19.

Lastly, I would like to take a moment and bring you up to speed on our recent refinancing actions.

As many of you know, we have some bond maturities coming up in 2013 and we have been proactive getting head of these.

We have worked hard to avoid as much negative carry as possible, while removing refinancing risk.

First, we increased our revolver capacity by approximately it $225 million.

We also closed on a delayed draw, five-year, EUR365 million syndicated bank loan facility.

With that, I would now like to turn the call over to Adam for his comments.

Adam?

Thank you, Brian, and good morning everyone.

As you have heard this morning, second quarter business conditions remain solid in the Caribbean and certainly were challenging in Europe.

Asia, while still a small share of overall revenue, performed well.

Voyager of the Seas' entry into China was well received and we're excited about the prospect of offering Voyager class cruising in Asia for the rest of the year and beyond.

Yields were positive for most products, but this was partially offset by the decline in Europe yields.

In general, we find we are able to source late business where needed.

While we would prefer not to have to engage in the level of discounting we have had to do in Europe, we continue to demonstrate our ability to fill ships even in difficult market conditions.

We are able to attract both first time and repeat cruisers with tactical efforts, but our percentage of repeat cruisers is slightly elevated in comparison to prior years.

It's not surprising that in more challenging times, experienced cruisers who viscerally comprehended the value of our product will gain share of our mix.

It is premature for us to comment on 2013 bookings, however, I will note a couple of strategic aspects of the upcoming year.

First, Royal Caribbean international will decrease in capacity by 4% in 2013.

Our growth trajectory will not resume until we take delivery of the first Sunshine ship in late 2014.

The overall year-over-year growth for the Company in 2013 will be up by just over 1%.

Second, since the last earnings call, we announced the redeployment of Mariner of the Seas to China next year.

With Mariner's reassignment and other deployment changes, the result will be a large increase in our Asia and Australia capacity, a small increase in our Caribbean capacity, and decreased capacity in Europe.

Specifically with respect to Europe, the Company overall will have 10% less capacity in Europe in 2013.

Moving to on board revenue in the second quarter, the year-over-year spend was slightly up.

A number of on board areas contributed to the positive momentum, offset by a year-over-year decrease in gaming expense.

In addition to Americans spending more on a year-over-year basis, we continue to improve our ability to generate higher on board spend from guests in many of our priority markets.

On the other hand, we saw decreased year-over-year spend from guests from the major Southern European markets.

Richard and Brian both noted that we have managed to offset some of the decrease in expected revenues with additional cost savings.

We continue to focus on cost control even as we expand globally and generate our highest guest satisfaction ratings in recent years.

Given a highly competitive environment, these of the other cruise competitors and myriad land vacations, we intend to strengthen our product offering, even as we manage our costs tightly.

Brian?

Thank you, Adam.

We'd now like to open the call for your questions.

As a reminder, we ask that you limit your questions to no more than two.

If you have more than that we would be happy to address them after the call.

Sabrina, if we could open the call for questions, please.

(Operator Instructions) You have a question from Robin Farley with UBS.

Thanks.

I do have a few of questions, one on bookings.

First, I guess on capacity.

It sounds as if you're likely to order another ship in the next three months or so, or maybe by year end in order to get something by 2016.

I was wondering if you could give us a little color about what your thoughts are strategically, on that ship, the brand and size, that kind of thing?

Robin, Richard here.

That's a broad question.

I think we clearly are looking at that sort of thing.

I don't think we're in a position to be specific about it.

I think what we're looking at is we see that even in this market we can get some very attractive returns from some of our vessels that have performed well, and we do see both the better performance in terms of the revenue, the lower costs and the better fuel consumption from some of our ships, and so yes, we are looking at some possibility.

As I indicated, though, in today's market you couldn't get a ship before 2016 anyhow so it's a ways off in the future.

But we are looking at the kinds of ships that are even in today's world generating nice returns.

Okay, great, thank you.

And then the question on bookings.

If I'm reading the charts right and thank you for the granularity, the detail you were giving in the booking charts, it's very helpful.

Just looking at the hole that needs to be filled for Q3 in terms of load factor.

How should we think about, I guess we think there will be more discounting ahead to fill that?

Is Q4, if I'm looking at the chart right, are you actually -- it looks like you're ahead in load factor in Q4?

I guess I'm just trying to get some color around how do we know the promotional environment won't continue past Q3 if we've got more discounting ahead?

Robin, I'll comment now and if Adam wants to add anything from his prospective.

Clearly, Europe has required more discounting as I think you saw in the slide than we had projected.

We knew that we were going to have to stimulate the market to some degree and assume we would have some pricing deterioration in Europe for the third quarter, but it was more pronounced than we expected.

Alaska, we've seen a little more discounting in the market than we expected, but as I mentioned in my comments, they were very close to matching the record yields we had a year ago.

I think we feel as though we have a pretty good handle now on Europe for what it's going to take in the third quarter.

As we get to the fourth quarter, Europe becomes much less important to us, and we shift more of our capacity share to the Caribbean that we've seen in the second, third, around fourth quarter, the Caribbean pricing has held up pretty well.

We are running, for Q4 we are ahead on both load factor and APD today.

I think if you extrapolate from our guidance that we are looking at modest yield improvement in the fourth quarter on a constant currency basis.

It would be low single digits and we think that the order book that we have in place and what we've seen from an elasticity prospective, that those are good numbers.

Okay, great, thank you.

Our next question comes from Felicia Hendrix with Barclays.

Good morning.

Also thank you for the charts.

Everybody loves your charts with no numbers.

Just kind along those lines if we just try to think about you have your load factors year-over-year and the charts, and that's pretty clear.

If we look at historical booking trends third quarter, you're usually 85% to 95% booked, fourth quarter 50% to 75% booked.

How is your business in each of those quarters relative to those historical guidelines?

We would be within the ranges that you're mentioning.

For Q3, we're obviously behind where we would normally be at this time, and for Q4 we're doing a little bit better than we would expect.

It's interesting.

What we're seeing from a load factor prospective is somewhat consistent with what we experienced during the wave period and through the second quarter where most of the gap that was created in booking activity in the post Concordia environment really related to the second and third quarter.

As we mentioned back in February, we really weren't seeing much of an impact on the longer term bookings.

I believe we even commented that Q4 and Q1, albeit very small volumes, they were maintaining their pace quite well.

I think as you can see from the graph we've provided that Q4 has held up that way since the April call.

Then I meant to throw in there, Q1, I don't think you gave any color on Q1 yet.

We're purposely being somewhat evasive about 2013 at this point, not getting ahead of ourselves.

Our order book is solid at this point, our load factors are running head of a year ago.

If we wrap that into the other question that would have been one, so can I ask one more quick one?

Sure.

Thanks.

You guys talked about the costs reductions that helped to offset some of the revenue decline.

I was wondering if you could give us some examples of what you're doing.

I don't know that -- This is Adam, Felicia.

I don't know if there's any one thing that's so notable that it jumps out.

We have noted over the last several years where there's been ongoing macro economic challenge that our constant intent is to make efficiency gains that do not affect the quality of the product that the guests experience, and also we, of course, have been expanding our global footprint from a sales and marketing and deployment standpoint.

It's a lot of attention to small changes in costs at the margin, and which would affect net cruise cost X fuel.

And then at the same time doing everything within our power to try to minimize fuel costs which, of course, have no benefit for the guests.

Okay, thank you.

(Operator Instructions).

your next question comes from Steve Wieczynski with Stifel Nicolaus.

Yes, good morning and thanks.

So Brian, you talked about the booking window in Europe and you said that's contracting some.

Is there anyway to break that out versus Northern Europe versus Southern Europe, or is that too hard do?

I think what we would say is that we've seen more contraction in the booking window in Southern Europe than we have in Northern.

Northern has held up better.

I think the closer the Southern European economies are clearly the ones that are on the radar, and I think we're seeing a little more of a lingering impact from the incident back in January, closer you get to the epicenter.

Okay, gotcha.

Then bigger question that might be more for Adam.

The decrease in capacity in Europe in '13, clearly you're trying to move out of that market.

Do you think the market is going to be impaired for a couple of years or is it something where you think there's better opportunities in other parts of the world?

Well, clearly we feel there are opportunities in the Asia/Pacific region that are emerging for our Company and certainly the Royal Caribbean International brand.

That is an effort that we've had in place for several years that's beginning to bear fruit, would have borne fruit in 2011 but for the situation that unfolded in Japan.

And the China market is beginning to catch on to cruising as preferred vacations type.

I believe a number of people in China refer to Voyager of the Seas which is there now as the Asia super boat.

We're moving in a measured manner capacity there.

Next year that takes place in the form of Mariner of the Seas going there replacing Legend of the Seas, which is an uptick in capacity and will leave us with two Voyager class ships in the region.

We've pointed out in a number of ways that the Caribbean remains solid for us.

We've made certain adjustments, for example, Royal Caribbean international will be back to offering a year 'round San Juan based product which has been successful for us over time.

And we'll resume that.

But I want to make sure that people understand that even with a 10% increase in the Company's capacity in Europe next year, that still keeps Europe as an important strategic element in our deployment program and in our Company's assessment of market opportunities, even with Europe's difficulties it's a tremendous size of vacation market, and a lot of opportunities to go on cruises nearby.

We are changing things at the margin in the direction of Asia Pacific and to some degree in the directions of North America, but it is still our intent to do profitable business in Europe as well.

Great, thanks, guys.

Your next question comes from Steve Kent with Goldman Sachs.

Hi, good morning.

Richard, you mentioned earlier that you're running at 3% long-term supply growth, but it now looks increasingly likely that GDP, especially in Western economies, are going to maybe even one to two percentage points lower than that, so maybe supply should be even lower than that 3% especially as you've now noted that low supply does create some pricing power.

So I just wanted to know what you're -- that 3% going to 1% to 1.5% over a longer term view or is that 3% where you want to keep it?

Thank you, Steve.

What I actually mentioned was our -- specifically our growth rate over that period was a little under 3%.

I think of course one of the things that happens with cruise capacity is it's not a continual curve.

You don't say I want 2.38% because the ships come in large increments, so getting it smooth and getting it precise within a percent or so is frankly isn't the way we look at it.

The other thing I would emphasize is in terms of the market where we're not dealing with an existing market that is growing, although that is happening in, for example, the United States or in Europe, a lot of what we are doing with our capacity is shifting it to new markets and in essence opening up new demand.

So, for example, this year, Adam talked about moving the Voyager of the Seas from Europe to Asia and in particular, China.

That actually brought down our capacity in the existing markets and the Voyager this year and Mariner next year, those are going into entirely different markets that essentially didn't exist before.

So to relate to your comparison, which I think is an interesting one, I would actually say you ought to look at what we're doing with, in effect, the existing market, which is pretty flat or only slightly growing as opposed to taking capacity out of those markets and moving them into what's proving to be a very exciting Asian market.

I think that's the way we're looking at it, but I also would emphasize we're not just focusing -- we're not going to get it accurate within a percent or two.

I guess the only reason I want to come back to you on that because just recently Carnival noted that New Zealand and Australia was showing some weakness because of over-supply and Europe, just a few years ago was viewed as the big, hot, new market, then it got over-built.

So I'm just concerned that as you move some of the supply into Asia we repeat that pattern, and that's maybe why that supply growth overall needs to come down.

Well, I think there is no question that we like any other industry, you do have cycles and you have times when you do too much into an area, and we have said that we think the lower capacity growth will be a driver of demand, sorry, a driver of increased rates, so we think that's a good trend to go in.

But, for example, you talk about Europe.

It wasn't that we overwhelmed Europe.

Frankly, it was that Europe suffered two calamities that we really didn't anticipate.

We did not anticipate the unfortunate tragedy in Italy.

We didn't anticipate the financial and capital markets meltdown in Europe, and we didn't anticipate the Arab spring.

I think in those cases it is a question that the market actually changed and I'm not sure we'll ever be able to anticipate those things.

We do have, you mentioned Australia and New Zealand, and that's true because those markets have been so robust that we probably as an industry have put too much into them.

I'll actually come back to something that Adam said.

It's not growing as quickly as it did and it's not getting the kind of rate increases, but it's still getting very robust rates, so I don't regret having more capacity in a market that is getting very robust rates, but those rates may be stable instead of going up.

I think that's the overall way we're looking at it.

All right, thank you.

Your next question comes from the line of Tim Conder with Wells Fargo Securities.

Thank you.

Just as it relates to somehow trying to put some quantification on what would be go-forward next year in Europe.

Brian, you very distinctly called out, and so has Carnival that the majority of the impact has been in the second and third quarters, and you're seeing that in the charts you guys have.

And by the way thank you for those also, and for the additional verbal color on everything.

If you look at those and you look at the adjustments, can you, I know it's a very difficult question, can you somehow say, okay, we believe we're starting to get some normalization post Concordia from that aspect alone?

Anything can you give along that line, Brian.

Thank you, Tim.

I think it's very premature to try to speculate how Europe's going to recover.

I'll give you a couple of statistics we have, for 2013, I'll give you the percentage of our capacity that is in Europe by quarter.

It's 1% in Q1, it's 31% in Q2, it's 49% in Q3, 24% in Q4, and the overall is 27%, which is down from 30% this year.

I think we are seeing in Europe a gradual healing from the incident in Italy.

The economy is still, depending on what day you listen to the news reports, we're going into a depression in Europe, and other days they're feeling very good.

Like today Euro had a nice pop this morning because they think that they're going to support the Euro.

I can tell you that we do a lot of price shopping as I know all of you do.

I think on average we're seeing the pricing above the current levels for next year, but lower than they were back in the beginning of January.

I think the base of business is we're on a load factor prospective, we're doing a little bit better in Europe right now than we were a year ago with tough comparables being a good part of that is probably driven by the capacity reductions, but I think it's just way too early to speculate.

I think it's really probably going to be until we get into the wave season that we're going to have a pretty good handle on what we're going to see in Europe next year.

Great, thank you, that's definitely helpful.

Then I guess a little bit specific color on Pullmantur.

How is that going?

I know that's part of the itinerary and overall deployment-related changes there.

How is that specifically within the context of a very challenged European environment?

Very challenged.

You're absolutely right.

Spain, of course, we've talked about two things that are impacting Europe, then we've talked about the impact of the tragedy in Italy, and we've talked about the impact on the economy, and both impact Spain in particularly, it's probably bigger on the economic side.

Spain is clearly one of the most challenged economies in Spain and that is the euphemism I think we all used because it really is a very difficult economic environment.

It is one of the biggest sufferers within our fleet.

Having said that, I think the management of Pullmantur has done an outstanding job of dealing with a very difficult situation.

They have done that both by positioning themselves better within Spain, but also by shifting a lot of their capacity out, so Pullmantur, for example, has gone from I think it was 87% Spanish customer-base to now closer to 40% Spanish customer-base as they shift demand to places like South America and Brazil.

Unfortunately, if there's one particularly painful area and one that looks like it may be with us for a while, I would have to say the Spanish economy fits that bill.

Okay, great, thank you, gentlemen.

Your next question comes from the line of Greg Badishkanian with Citigroup.

North American source passengers, over the last month or so, maybe any color on the changing trend of those passengers going to Europe, and maybe if there's any airfare impact on those bookings?

Hi, Greg, it's Adam.

We have certainly heard a fair amount anecdotally and from certain travel agents, and to some degree from the package tour sector about how European airfare is being an impediment to American travelers going to Europe.

I think on the last call I mentioned that one of the options that we have because we're marketing at a high level in North America and Europe, is that to the extent that European customers might not buy our cruise products in Europe as aggressively, then we could market more toward North Americans and to some degree fill in.

Notwithstanding the antidotal stories about high airfares as an impediment.

In fact, the percentage of our customers on our European cruises in 2012 that are coming from North America will be a few percentage points higher than what we they were last year or what we had originally expected them to be.

It's not a seismic shift, but it is slightly higher which means that notwithstanding whatever the airfare impediments have been, we have been able to get some additional help from North America with the various challenges we face in Europe.

That's helpful.

I'm wondering if over the last month or two if there's any change in that trend?

I don't think that there has been a notable change in that trend.

We mentioned earlier that we've been able to drive late business in Europe, albeit at discounted rates, and that is primarily a function of European sourcing, so that's probably more where the action is at the moment.

And my second question, just from a European source business, again, if you look over the last month or two the change in trend.

Is it Southern Europe that softened a little bit or is it also Northern Europe, or is it broad-based.

The only trend that I would note, I don't even know if it's fair to call it a trend, there was a big question as to whether we would see significant late booking business in Europe from the European countries as we headed into July/August for the sailings that are occurring in August, September, October, and what we see that are we, in fact, able to draw the late business at good volume clearly not at the rates we would like to be commanding for these products, but we are able to drive the business, so that is coming from actually all European source markets.

Okay, thanks.

Your next question comes from the line of Jaime Katz with Morningstar.

Good morning.

Maybe you can talk just a little bit about how you guys think about your hedging strategy and has it changed at all with respect to at least currency and the volatility in oil prices in recent months?

Sure, Jaime, it's Brian.

In terms of the fuel strategy, we disclosed in our press release our hedging and it's pretty thorough frankly going out.

We are in the money for the balance of 2012 and for 2013.

The hedges are effectively neutral beyond that point.

We're pretty methodical in the way we hedge our oil.

We have certain targets that we like to hit on a quarterly basis, so we'll be rolling in some minor hedges.

We're not trying to speculate with fuel prices.

We're really trying to just protect ourselves.

Interestingly, the good news this year is we tend to have exposure generally in the 50% range of fuel prices and we're pleased to see that this year that the inverse correlation between the dollar and fuel has returned, and as you can see on our bridge slide, bunker prices in FX were neutral to our latest guidance.

We have the natural hedge.

We don't do hedging on FX on an operating basis.

We have traditionally had a higher portion of our new build costs hedged.

We've been a little bit more bearish on the Euros so we've not had quite as much exposure there and we tend so have a little natural hedge on our P&L for that.

I think we've been less aggressive hedging our new builds.

As a consequence, if we were to hedge those today, we would have a benefit from when we originally entered the contracts, specifically for Sunshine.

Thinking back, I can't recall another time where there's been like this many years in a row of weak consumer spending.

Has there ever been a time like this in the past where you really thought about capital deployment and changing it because maybe there's something more structural rather than cyclical happening, or has the way you are thinking about capital spending going forward changed at all recently?

Well, I think obviously the biggest portion of our CapEx is new builds and as Richard alluded to, if you go back to the 1990's you were looking at 10% growth.

If you look at the early 2000's you had high single digit growth, and we're now targeting more low to the top end mid-single digit growth within a given year.

We have been investing in CapEx in our existing fleet rather than a whole lot of new capacity.

As Richard mentioned in his comments, we don't have a new build in 2013 and we have only one in '14 and '15, but we're taking the best practices of both say the Oasis class and Solstice class vessels which have been extremely successful to us.

We're taking the best practices and retrofitting those.

It's a way of keeping the product fresh and keeping our customers excited about our brands and the product we offer without adding a tremendous amount of capacity to the market to help our pricing performance.

Thanks.

The only other area I mentioned we are investing in is within the information technology area.

Then again we think the return on those investments are going to be tremendous.

Thank you so much.

Sure, thank you.

Our next question comes from the line of Assia Georgieva with Infinity Research

Good morning, guys.

One question that's more focused on North American source passengers.

The Caribbean has been strong for at least four quarters now.

How would you characterize North American demand?

We're probably not close to 2008 levels, but where do you see it relative to the history?

We're of course, Assia, bigger than we were in 2008 so the number of guests that we're attracting on these cruisers is higher and the yields are also commensurate with the 2008 levels at this point.

We're not going to sit here and celebrate where we are in terms of our Caribbean yields.

We have referred to the business I think on a couple of occasions today as being solid.

It's up year-over-year.

It's commemorate with the best year that we had in 2008, and so it gives us a good foundations on which to think forward about the region and how we operate in it, and with the resurgence of Asia following what happened in Japan last year and the solid positioning in the Caribbean, it allows us to focus on what we need to be doing in Europe to maximize the opportunity that we have there an deal with the challenges, and hopefully all of that adds up to a proper foundation for the next few years.

Thank you, Adam.

And then my second question is much more of a closer in issue I guess.

You mentioned that European volumes are -- closing volumes up at rates down year-on-year.

Could we see some further upside over the next couple of months, you did specifically mention July, August volumes for September, October voyages.

Well the volumes essentially will be, need to be higher on a year-over-year basis but close in volume because we have a larger capacity hole to fill in Europe because of the way that the market developed this year.

But what I had suggested earlier in my comments is that there was a natural question about whether we could in fact find that volume for the August, September, October sailings and at this point I can say that we are finding that.

So the comparatives to last year are really going to be a function of how much capacity there was at this point last year and how much there is at this point this year, but our focus is on making sure that we put the right discounting programs into the market to realize the remaining volume that we need.

Great, thank you so much, Adam.

Your next question comes from the line of James Hardiman with Longbow Research

Good morning guys.

Thanks for taking my questions.

I guess first I was hoping you could talk at least some, to the degree that you have any decent data on this, the market share developments in Europe.

It seems to me you guys have two benefits in Europe.

The first is that your brands are not really the focus of a lot of the ire stemming from the Concordia disaster.

Secondly the fact that you have the flexibility to adjust the deployment out of Europe.

So obviously Europe has been historically a bit of a tough nut to crack from a market share perspective.

Obviously the entire region is challenged.

But it would seem that maybe you guys are potential beneficiary from a market share perspective.

Maybe you realize a little bit of a price premium.

So this year, can you talk about sort of what you're seeing from a market share perspective and given the 10% capacity reduction there, how do you think about strategically going after market share in Europe next year?

Hi, Jim, it's Adam again.

I should note first that in the UK market, which is still I believe still the second largest market in cruising today, we have had a significant market share and have been a major player in that market for over 10 years and will continue to be a major player there.

It's really been on the continent of Europe, and especially in Southern Europe where we have ratcheted up our presence and our sales and marketing efforts.

It doesn't influence market share that much in the short to medium term to be honest because our competitors are also investing in Europe and growing and putting ships there.

But we have seen the opportunities that emanate from a very large vacation market that's catching on to cruising, and we expect to be a long-term player there.

I did mention before when I was talking about the fact that the Company will be down 10% in capacity next year over this year in Europe, that we've made certain adjustments at the margins, some of them which have to do with increasing our presence in Asia, and what we can see is that the industry overall is making some changes which will probably result in Europe having a slightly less share of the overall cruise industry in 2013 than it had in 2012, but just to be clear I'm talking about something like about 33% this year to maybe somewhere between 31% and 32% next year, so again, it's not a seismic change, but it does reflect the fact that our industry and our Company's assets [ter] mobile, and over two to three year period, especially when we do our deployment cycles we're able to make changes that are reflective of the market opportunities and challenges that we see so some of that is going on with us next year in Europe.

So we will continue to be a significant player there.

Very helpful.

And then second question, sort of moving our attention to beyond Europe, and I'd like to echo the comments on the really helpful increased disclosure here.

I was hoping you could just bottom line some of the trends X Europe.

It looks like pricing came down a little bit in the Caribbean and Alaska, but you are obviously helped in Asia.

Was the net result of those three items essentially in line with how you felt the year would play out as of April?

I think you gave us ticket yields expectations for the year up 5% to 6% X Europe.

What did that look like three months ago or heading into the year when you thought about excluding Europe trends for 2012?

Thanks.

This is Brian.

I would say that particularly over the last three months, excluding Europe, we're pretty much exactly where we thought we would be.

I would say Caribbean is spot on.

I would say Asia is probably a little bit better than we expected, and Alaska would be an eyelash lower than we would have anticipated.

When you ask about the beginning of the year, I think that the 5% to 6% on the balance to non-Europe would have been a little bit higher, and I say that mainly because of the impacts that we saw on Concordia.

We have been able to recover a lot of gaps that we saw in Q2 and Q3 on the non-European products, but clearly there's been much more pronounced impact on Europe.

Very helpful.

Thanks, guys.

Thank you.

Your next question comes from the line of Bryan Egger with Topeka Capital Markets.

Good morning.

May have all ready asked this question, I was off the line for a second, but I wanted to know if you could parse a little bit between a level impact with the Euro zone-related demand weakness in terms of Northern Europe versus Southern Europe?

To the degree there's been discounting that you can identify with the Euro zone crisis.

Can you maybe give us a little better sense of as in past disturbances related to the Concordia accident and whether or not it seems to be more Mediterranean market centric and less related to your Northern European source customers?

Hey, Brian, this is Adam.

First I think it's worth reinforcing that the Mediterranean market is just a bigger market.

There's more volume, there's more happening there than Northern Europe, so they're not equal sized.

Bearing that in mind, we've also indicated during the course of the call that in relation to our original expectations, we faced more pricing pressure and have had to do a higher level of discounting, and I guess you could say work harder for the business in the Mediterranean than we have had to do in Northern Europe.

All of it is a challenge, but since you ask about the relative degree of challenge, it's been greater in the Med than in the North.

Okay, thank you.

Sabrina I think we have time for one more question, please.

Next question comes from the line of (Inaudible) with Jefferies.

Thank you.

All of my questions have been answered.

Thanks.

Okay, Sabrina let's try one more.

Your next question comes from the line of Michael Kass with Blue Mountain Capital.

Thanks for leaving me on the back end.

Was wondering if you could provide a little bit of color with regard to the deployment-related endeavors, the impact on net cruise costs going into 2013?

Should some of that constitute a tailwind?

Will some of that be one-time costs verses what you expect to be ongoing, whether it's distribution, spending related, et cetera?

How should we think about the -- as you referred to the full year impact of that this year, how that will translate into next year?

Well, every year, Michael, there's periods of deployment changes happen throughout the brand and therefore the fleet.

Some of them drive higher net cruise costs, some of them lower.

I don't see anything particularly special about 2013 as it relates to deployment driven cost changes of the margins of the business.

I would say in that respect, it's a fairly stable outlook, but there of course will be many different variables that affect the overall cost development, I just don't see that one as being particularly notable.

I'm sorry, I meant the lapping of the deployment initiatives that you have announced and are putting into place this year, which you've broken out the costs and the revenue impact of those.

On the cost side, will you on a comparable year-over-year basis benefit next year or are these one-time costs, or are these costs that will reoccur in 2013?

We see next year as to respect with what you're talking about, we see next year being more or less neutral in comparison to this year on those factors.

Lastly, I was wondering, could you provide any breakdown of what your capacity is going to be by region for the remainder of the year and for 2013?

In other words, just to refresh.

I'm trying to get a sense for what the overall capacity increase is likely to be, for example, Asia next year year-over-year.

We're looking for that if you can just give me one second.

I don't have it for the balance of the year.

I have it for the full year.

Oh, sure.

For 2012, the Caribbean is about 42%, 43%.

Europe is about 30%.

Asia is about, if we take Asia and the South Pacific, we're looking at about 8% there.

Alaska is about 4%.

Then I would just put the others in an all other category.

I'm sorry, Michael, we don't seem to have '13 at that level.

If you could give Ian Bailey a call, he can provide that to you.

Okay, thanks a lot.

And if I could just tie it in.

With the European waiting, are you mentioning the 10% decline in Europe overall.

Is there a sizeable shift next year in versus of Southern versus Northern?

There's a slight shift in market sourcing towards the UK, but not a big shift in the deployment of ships as between North and Med.

Okay, thank you very much.

We just want to thank everyone for joining us today.

We realize today's a very busy earnings call day, so we do appreciate you dialing in.

If you have any further questions, Ian will be available throughout the day.

Have a good one.

This concludes today's conference call.

You may now disconnect.